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EuroZone CPI and What the ECB Could Do

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Tomorrow we get our first look at this month’s inflation figures from the EuroZone. This data is critical for the shared currency because this is the data that the ECB will have when going into its interest rate decision two-and-a-half weeks from now. Since it’s flash data, it might be revised later, of course. But those revisions typically are rare and small, so it would be a major shake up if it were to happen. For now, what happens with the Flash November CPI is likely to define the Euro’s trajectory until the ECB meeting.

The thing is, the moment of the data release might not have the biggest reaction in the market because the two largest economies report ahead. Thus, the market has a pretty good idea of directionality. If both France and Germany’s inflation is below expectations, then the market will expect the Eurozone to have a similar pattern. If those two countries come in above expectations, then the same will be expected for the whole shared economy. But if both France and Germany go in different directions, then the market could hold off until the full data is released.

What to look out for

France reports its inflation figures fifteen minutes before the opening of the markets in Europe. Inflation is expected to tick up slightly to 6.3% from 6.2%, which is the opposite of what was expected for Germany. France has been able to keep a better lid on inflation lately thanks to its nuclear power making it less reliant on higher natural gas and crude prices. But that also means it doesn’t benefit from those commodities dropping in price, which has been the theme for the last couple of months.

Eurozone Flash November CPI annualized rate is expected to drop to 10.3%, down from 10.6% prior. Despite staying in double digits, it would be the second consecutive drop in prices since the start of the latest inflation crisis. Markets could take it as a sign that inflation is finally peaking. Of course if it were to come in above 10.6%, that would break a downward trend and might cause a reassessment of what’s expected from the ECB.

Lagarde insists on hiking

Yesterday, the ECB’s chief insisted that more rate hikes were coming, but refused to provide specific guidance. Lagarde said that policy is still “accommodative” and might have to move into restrictive territory before inflation is properly under control. She also said that the ECB would discuss quantitative tightening at the next meeting.

This mirrors comments from Fed officials, who also insist that a pause in rate hiking is nowhere near. For now, the trajectory of the EURUSD comes down to the differential expectations in rate policy. The Fed was first to raise, which gave the dollar a boost. But that also implies the Fed will likely be the first to start easing off, which would mean the ECB could keep hiking while the Fed does not.

That sets the conditions for the interest rate gap that drove the Euro below parity with the dollar to reverse. However, the timing for that still depends on how the respective inflation data from the two economies evolves.

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